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Collateral, reallocation, and aggregate productivity: evidence from the U.S. housing boom


Doerr, Sebastian (2018). Collateral, reallocation, and aggregate productivity: evidence from the U.S. housing boom. .

Abstract

This paper shows that rising real estate prices reduce industry productivity, because they lead to a reallocation of capital and labor towards inefficient firms. I establish that the rise in real estate value during the US housing boom relaxes firms’ financial constraints. Companies borrow additional funds to invest, hire labor, and increase output. However, firms holding real estate are significantly less productive than non-holders. Rising real estate prices thus reallocate capital and labor towards inefficient firms. This has significant negative consequences for aggregate industry productivity. I find that industries with stronger growth in real estate value see a significant reduction in total factor productivity growth. A 10 % increase in real estate value lowers TFP growth by 0.62 %. The negative effect is driven by misallocation. To shed light on the role of financial sector, I show that banks with superior information about borrowers are better at identifying productive borrowers and supply less credit to unproductive firms when collateral values rise. My results provide direct evidence that financial frictions drive misallocation and suggest a channel for reallocation’s falling contribution to growth in recent years.

Abstract

This paper shows that rising real estate prices reduce industry productivity, because they lead to a reallocation of capital and labor towards inefficient firms. I establish that the rise in real estate value during the US housing boom relaxes firms’ financial constraints. Companies borrow additional funds to invest, hire labor, and increase output. However, firms holding real estate are significantly less productive than non-holders. Rising real estate prices thus reallocate capital and labor towards inefficient firms. This has significant negative consequences for aggregate industry productivity. I find that industries with stronger growth in real estate value see a significant reduction in total factor productivity growth. A 10 % increase in real estate value lowers TFP growth by 0.62 %. The negative effect is driven by misallocation. To shed light on the role of financial sector, I show that banks with superior information about borrowers are better at identifying productive borrowers and supply less credit to unproductive firms when collateral values rise. My results provide direct evidence that financial frictions drive misallocation and suggest a channel for reallocation’s falling contribution to growth in recent years.

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Additional indexing

Item Type:Scientific Publication in Electronic Form
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Collateral, misallocation, productivity, real estate, housing boom
Language:English
Date:July 2018
Deposited On:05 Sep 2018 12:22
Last Modified:29 Mar 2019 08:53
Series Name:SSRN
Number of Pages:66
OA Status:Green
Official URL:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3184162

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